Warren Buffett’s stock choices frequently make headlines, due to his long-term success as a billionaire investor. The ‘Oracle of Omaha’ doesn’t often buy UK shares, but I reckon I’ve found two stocks he’d possibly pick.
As my starting point, I looked for businesses with reliable customers, good profitability, and strong cash generation. In my view, these are the hallmarks of all Buffett’s most successful investments, including his £81bn stake in Apple and his near-10% holding in Coca-Cola Co.
The perfect business?
My first pick is FTSE 100 stock Bunzl (LSE: BNZL). This £8bn business supplies consumable items, such as cleaning supplies, PPE, and packaging to businesses all over the world. Bunzl isn’t exactly a household name, but it’s a big player in this market. In 2020, sales rose above £10bn for the first time.
Bunzl benefits from a large customer base who make regular, repeat purchases for relatively low values. The products supplied by the company are often essential and can’t easily be skimped on. Bunzl’s global reach and buying power means the group can offer a better choice of products than smaller local rivals.
I reckon Bunzl’s stable profits, steady growth and reliable customer base would make this business attractive to Warren Buffett. Bunzl also has another big attraction that’s important to Buffett — it’s very profitable and generates a reliable supply of surplus cash.
The right time to buy?
Bunzl isn’t perfect. The company’s growth has slowed in recent years as the business has expanded. Sales and profits are actually expected to fall this year as demand for Covid-19-related products return to more normal levels.
This UK share isn’t obviously cheap either. Bunzl currently trades on around 17 times forecast earnings, with a dividend yield of just 2.4%.
However, I believe the group’s business model will continue to deliver reliable growth for many years yet. At current levels, Bunzl is a stock I’d buy today.
This UK share yields 8%
My second stock is Direct Line Insurance Group (LSE: DLG). This home and motor insurer operates in a sector that Buffett understands well.
When he was still a student in the 1950s, he bought shares in US insurer Geico. Back then, Geico was unusual among insurers in selling car insurance policies directly to customers.
Starting in the 1970s, Buffett’s company Berkshire Hathaway bought shares in Geico. By 1996, it owned the entire business.
Here in the UK, Direct Line started selling insurance direct to customers by phone in the 1980s. It was one of the early pioneers of this direct model and is now a £3.9bn FTSE 250 business.
I like Direct Line because it offers an attractive combination of size and profitability. It’s one of the UK’s larger motor insurer and has generated an average return on equity of around 15% since 2015.
Tough market conditions have led to limited growth in recent years. But CEO Penny James is investing in new technology and I expect this to start generating results over the next year.
Direct Line’s shares are out of favour at the moment. This has left the stock with a forecast dividend yield of 8.5% for 2021. In my opinion, this payout looks quite safe. I’ve owned this UK share for a while now and I’d like to buy more.